In this episode of The SIFMA Podcast, SIFMA’s President and CEO, Kenneth E. Bentsen, Jr., sits down with Katie Kolchin, CFA to discuss the themes and market metrics that are shaping the U.S. fixed income markets in 2025.

Transcript

Edited for clarity 

Ken Bentsen: Hello and thank you for joining us for this episode of The SIFMA Podcast. I’m Ken Bentsen, President and CEO of SIFMA and your host. Treasury issuance dominated the fixed income landscape in 2024, with long-term issuance up 33% year-over-year. What does that mean for trading liquidity? The federal debt has reached an eye-popping $28.3 trillion and will likely continue to rise. What’s the impact on the government’s interest expense and deficit?

Today, we are going to discuss the themes and market metrics that are shaping the U.S. fixed income markets in 2025. I’ve invited Katie Kolchin, Managing Director and Head of Research at SIFMA and author of SIFMA Insights, to discuss her latest Fixed Income Market Structure Compendium. This comprehensive compendium reviews fixed income markets in 2024, outlining key metrics across various sectors, including Treasuries, corporate bonds, and mortgage-backed securities. It highlights themes such as Treasury clearing developments, shifts in Treasury issuance patterns, the evolving composition of Treasury holders, and the state of market liquidity. The U.S. capital markets are the largest in the world and continue to be among the deepest, most liquid, and most efficient. U.S. fixed income markets comprise around 40% of the $142 trillion securities outstanding across the globe, or $56 trillion; this is 2.1x the next largest market, the EU.

It’s my hope that this conversation gives us a big-picture perspective on not only what’s ahead, but also why these markets are so critical to driving opportunity, innovation, and growth. Your comments and questions are welcome. You can reach us at [email protected].

Let’s begin with a quick look at 2024 market metrics. Katie, what did the numbers tell us about the markets?

Katie Kolchin: Okay, so last year Treasury ADV ended over 900 billion, a 19% increase year over year. In fact, eight out of twelve months were above this level with August over one trillion. That was quite a jump from the year before where we had zero months that breached the 900 billion threshold. So with automation enabling higher volumes, this is coupled with uncertainty driving volatility, 900 billion-plus now looks to be the norm.

In fact, for the first two months of this year, we’re averaging over one trillion in ADV. Shifting to corporate bond trading, ADV averaged over 50 billion in 2024, plus 21% year over year. While not in the trillions like Treasuries, growth was still impressive. Beyond this top-line figure, the monthly trends were quite interesting. There were seven months over 50 billion with one month over 60 billion. This contrasts to only one month over $50 billion in 2023. Higher volumes were supported by continued electronification in this market, as well as investor demand for higher-yielding bonds, making these levels also potentially the new norm. For the first two months of this year, ADV was just shy of $60 billion.

Ken Bentsen: So maybe now let’s move on to what investors are watching. A key theme is not just fixed income, but also equity markets, looking at really exponential increases in treasury issuance. What does the data say about the growth of the debt?

Katie Kolchin: So when we first started looking at these numbers, we had to switch the analysis to percent changes in addition to the numbers or levels of issuance. After all, with 28 trillion in treasuries outstanding, what is another trillion? So in 2023, treasury issuance was plus 221% to the historical average at 3.1 trillion. Last year, issuance was plus 145% to the historical average at 2.4 trillion.

Let’s put this in context. The U.S. government went from issuing just under one trillion per annum on average pre-COVID to over five trillion in just the last two years. And these two years were what we call non-years. There were no recessions. The U.S. was not directly engaged in any wars, notwithstanding any geopolitical knock-on effects related to wars and geopolitical events, and no crisis of any kind.

Looking forward, based on Treasury’s estimates, the first half of 2025 alone is expected to be in line with that $1 trillion historical annual average. Extrapolating the first half estimate to the full year, issuance could be $2.3 trillion this year in another non-year. These continually elevated issuance levels came at the same time the holders of Treasuries have shifted to price-sensitive buyers. This is why economists and others consider the path of issuance not sustainable over the long run.

Ken Bentsen: So as you said, the level of debt held by the public is just north of $28 trillion. But notwithstanding that, the U.S. has proven to be quite resilient with a diverse and strong economy, certainly in comparison to the rest of the world. Does this level of debt matter to our economy in the same as it might to others? And what are the areas you’re looking at that might concern you?

Katie Kolchin: The level of federal debt securities held by the public hit the 20 trillion level in 2020. That year was an almost 25% increase from the prior year. After four more years of significant growth, we are now at the 28 trillion as you indicated. The numbers are the numbers, but let’s rephrase this into a key point. This growth came at the same time as rising interest rates. So let’s shift to looking at total U.S. debt. which includes that held by the public plus intergovernmental debt due. This now totals $35.5 trillion, which is a 53% increase since 2020. As the same goes, or at least it’s a saying if you’re a fixed income analyst, debt that has been issued must then be serviced. Since the end of 2023, interest payments have crossed the $1 trillion per annum threshold. Interest was $1.1 trillion last year an increase of 107% since 2020. Elevated interest rates compound the problem of a ballooning balance sheet. More debt means more interest due, higher rates mean higher payments. We equate this to a Tyson special. For those listeners who do not follow boxing, this was his power combo, back hook to the body immediately followed by back uppercut to the head. We’re not calling this a knockout for the government yet, but it is definitely painful.

Ken Bentsen: So fiscal policy feeds through not just debt outstanding, but also the deficit. You discussed the concept of non-year earlier. Excessive and rising deficits could lead to a return of the so-called bond vigilantes, as we’ve seen recently in some other jurisdictions. Are we getting closer to the vigilantes coming on the scene in the U.S.?

Katie Kolchin: Well, the data certainly holds the potential for that. The U.S. is running a federal deficit as a percent of GDP at levels typically reserved for recessions, active wars, or financial crises. Yet these levels are occurring in non-stress years. At 6.3%, we are at levels greater than several stress periods. We have a chart on this in the compendium, but just to highlight a few, today’s deficit is greater than the Great Depression and the stock market crash. Black Monday, the first Gulf War where the U.S. was actively engaged, the Asian financial crisis and failure of long-term capital management, and the dot-com bubble burst. The only time periods where the U.S. held higher deficits than today were during World War II, the global financial crisis, and COVID. Putting this in dollar terms, at $1.8 trillion, the latest reported deficit level was the second highest reported with only COVID posting a higher deficit dollar.

Ken Bentsen: So maybe let’s close this out with investor sentiment. What do you see?

Katie Kolchin: From a data perspective, we can gauge investor sentiment through the term premium on the 10-year treasury. We analyzed this in the compendium and found some interesting movements. So the Fed cut the Fed funds rate for the first time last September in 2024 with two more cuts to end last year. Despite this, and after the term premium being near zero at the start of September, the term premium climbed after that September FOMC meeting continuing to increase through the end of the year.

So the question that everyone posed was, why the disconnect? Typically, when you get your rate cuts, you start to have a term premium come down. Answer? Fiscal spending or fiscal policy. So fiscal policy can be inflationary, which can flow through to a slowing, or we hate to say it, a reversal of rate cuts. As such, the term premium rose and remains elevated. That said, it’s been interesting this year as many things in markets have been, that after peaking in mid-January this year at .81 basis points, the term premium ended February at .5 basis points. So while issuance, outstanding, and deficit data continues to concern economists, markets appear to be pushing through these issues. Or we should say markets have pushed through, but stay tuned for more on this.

Ken Bentsen: Katie, thank you very much for this discussion and I thank all of our listeners for joining us today. To read the report as well as its companion equity market structure compendium, please visit sifma.org/insights. You can learn more about SIFMA and our work to promote effective and resilient capital markets at www.sifma.org.

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Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance. 

Katie Kolchin, CFA is Managing Director, Head of Research for SIFMA and the author of SIFMA Insights.

Related Resource

• Insights

  Fixed Income Market Structure Compendium